Summary of Significant Accounting Policies

Preparation of Interim Financial Statements

Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), the condensed consolidated interim financial statements included herein have been prepared, without audit, by Emmis Communications Corporation (“ECC”) and its subsidiaries (collectively, “our,” “us,” “we,” “Emmis” or the “Company”). As permitted under the applicable rules and regulations of the SEC, certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, Emmis believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report for Emmis filed on Form 10-K for the year ended February 28, 2018. The Company’s results are subject to seasonal fluctuations. Therefore, results shown on an interim basis are not necessarily indicative of results for a full year.

In the opinion of Emmis, the accompanying condensed consolidated interim financial statements contain all material adjustments (consisting only of normal recurring adjustments, except as otherwise noted) necessary to present fairly the consolidated financial position of Emmis at August 31, 2018, the results of its operations for the three-month and six-month periods ended August 31, 2017 and 2018, and cash flows for the six-month periods ended August 31, 2017 and 2018.

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended February 28, 2018 that have had a material impact on our condensed consolidated financial statements and related notes.

Basic and Diluted Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Potentially dilutive securities at August 31, 2017 and 2018 consisted of stock options and restricted stock awards. The following table sets forth the calculation of basic and diluted net income (loss) per share:




	For the three months ended
	August 31, 2017					August 31, 2018
	Net Income		Shares	Net Income Per Share		Net Loss			Shares	Net Loss Per Share
	(amounts in 000’s, except per share data)
Basic net income (loss) per common share:
Net income (loss) available to common shareholders	$	69,957	12,292	$	5.69	$	(373	)	12,522	$	(0.03	)
Impact of equity awards	—		221			—			—
Diluted net income (loss) per common share:
Net income (loss) available to common shareholders	$	69,957	12,513	$	5.59	$	(373	)	12,522	$	(0.03	)



	For the six months ended
	August 31, 2017					August 31, 2018
	Net Income		Shares	Net Income Per Share		Net Income		Shares	Net Income Per Share
	(amounts in 000’s, except per share data)
Basic net income per common share:
Net income available to common shareholders	$	69,690	12,287	$	5.67	$	23,112	12,521	$	1.85
Impact of equity awards	—		176	—		—		974	—
Diluted net income per common share:
Net income available to common shareholders	$	69,690	12,463	$	5.59	$	23,112	13,495	$	1.71

Shares excluded from the calculation as the effect of their conversion into shares of our common stock would be antidilutive were as follows:



	For the three months ended August 31,		For the six months ended August 31,
	2017	2018	2017	2018
	(shares in 000’s )
Equity awards	1,960	1,929	2,276	876
Antidilutive common share equivalents	1,960	1,929	2,276	876

Local Programming and Marketing Agreement Fees

The Company from time to time enters into local programming and marketing agreements (“LMAs”), often pending regulatory approval of transfer of the Federal Communications Commission ("FCC") licenses in connection with acquisitions or dispositions of radio stations. Under the terms of these agreements, the acquiring company makes specified periodic payments to the holder of the FCC license in exchange for the right to program and sell advertising for a specified portion of the station’s inventory of broadcast time. The acquiring company records revenues and expenses associated with the portion of the station’s inventory of broadcast time it manages. Nevertheless, as the holder of the FCC license, the owner-operator retains control and responsibility for the operation of the station, including responsibility over all programming broadcast on the station.

On April 30, 2018, Emmis closed on the sale of substantially all of its radio station assets in St. Louis. The St. Louis stations were operated pursuant to LMAs from March 1, 2018 through April 30, 2018. The buyers of the stations paid LMA fees totaling $0.7 million during the period, which was recognized as a component of net revenues in the accompanying condensed consolidated statements of operations for the six-month period ending August 31, 2018.

On April 26, 2012, Emmis entered into an LMA with a subsidiary of Disney Enterprises, Inc. for 98.7FM in New York (formerly WRKS-FM and now WEPN-FM, hereinafter referred to as “98.7FM”). The LMA for this station started on April 30, 2012 and will continue until August 31, 2024. Emmis retains ownership and control of the station, including the related FCC license during the term of the LMA and is scheduled to receive an annual fee until the LMA’s termination. LMA fee revenue is recorded on a straight-line basis over the term of the LMA as a component of net revenues in our accompanying condensed consolidated statements of operations.

The following table summarizes certain operating results of 98.7FM for all periods presented. Net revenues for 98.7FM are solely related to LMA fees. 98.7FM is a part of our radio segment.



	For the three months ended August 31,				For the six months ended August 31,
	2017		2018		2017		2018
Net revenues	$	2,583	$	2,583	$	5,166	$	5,166
Station operating expenses, excluding depreciation and amortization expense	296		299		589		596
Interest expense	656		592		1,328		1,201

Assets and liabilities of 98.7FM as of February 28, 2018 and August 31, 2018 were as follows:



	As of February 28,		As of August 31,
	2018		2018
Current assets:
Restricted cash	$	1,358	$	1,239
Prepaid expenses	448		419
Other current assets	31		159
Total current assets	1,837		1,817
Noncurrent assets:
Property and equipment, net	208		198
Indefinite lived intangibles	46,390		46,390
Deposits and other	6,543		6,456
Total noncurrent assets	53,141		53,044
Total assets	$	54,978	$	54,861
Current liabilities:
Accounts payable and accrued expenses	$	18	$	19
Current maturities of long-term debt	6,587		6,864
Deferred revenue	835		864
Other current liabilities	184		173
Total current liabilities	7,624		7,920
Noncurrent liabilities:
Long-term debt, net of current portion and unamortized debt discount	45,632		42,259
Total noncurrent liabilities	45,632		42,259
Total liabilities	$	53,256	$	50,179

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets to the same amounts shown in the condensed consolidated statements of cash flows.



	As of February 28,		As of August 31,
	2018		2018
Cash and cash equivalents	$	4,107	$	7,150
Restricted cash:
98.7FM LMA restricted cash	1,358		1,239
Cash held in escrow from sale of magazines restricted cash	650		—
Total cash, cash equivalents and restricted cash	$	6,115	$	8,389

As of August 31, 2018, restricted cash relates to cash on deposit in trust accounts related to our 98.7FM LMA in New York City that services long-term debt. During the six months ended August 31, 2018, Emmis settled its dispute with Hour Media related to Hour's purchase of Los Angeles Magazine, Atlanta Magazine, Cincinnati Magazine and Orange Coast Magazine. Cash was released from escrow in May 2018 and is no longer classified as restricted. See Note 9 for more discussion.

Noncontrolling Interests

The Company follows Accounting Standards Codification paragraph 810-10-65-1 to report the noncontrolling interests related to our Austin radio partnership and Digonex Technologies Inc., a dynamic pricing business (hereinafter "Digonex"). We have a 50.1% controlling interest in our Austin radio partnership. We do not own any of the common equity of Digonex, but we consolidate the entity because we control its board of directors via rights granted in convertible preferred stock and convertible debt that we own. As of August 31, 2018, Emmis owns rights that are convertible into approximately 84% of Digonex's common equity.

Noncontrolling interests represent the noncontrolling interest holders' proportionate share of the equity of the Austin radio partnership and Digonex. Noncontrolling interests are adjusted for the noncontrolling interest holders' proportionate share of the earnings or losses of the applicable entity. The noncontrolling interest continues to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance. Below is a summary of the noncontrolling interest activity for the six months ended August 31, 2017 and 2018:



	Austin radio partnership			Digonex			Total noncontrolling interests
Balance, February 28, 2017	$	46,830		$	(13,909	)	$	32,921
Net income (loss)	3,151			(1,504		)	1,647
Distributions to noncontrolling interests	(2,254		)	—			(2,254		)
Balance, August 31, 2017	$	47,727		$	(15,413	)	$	32,314


Balance, February 28, 2018	$	47,424		$	(16,744	)	$	30,680
Net income (loss)	2,743			(1,184		)	1,559
Distributions to noncontrolling interests	(2,724		)	—			(2,724		)
Balance, August 31, 2018	$	47,443		$	(17,928	)	$	29,515

Recent Accounting Pronouncements

In January 2017, the FASB issued Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU was issued to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted this guidance on March 1, 2018 with no material impact on its consolidated financial statements.

In November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this guidance on March 1, 2018 with no material impact on its consolidated financial statements.

In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU was issued to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted this guidance on March 1, 2018 with no material impact on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842). This update requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance will be effective for the Company as of March 1, 2019. A modified retrospective transition method is required. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify the principles used to recognize revenue for all entities. The FASB deferred implementation of this guidance by one year with the issuance of Accounting Standards Update 2015-14. The Company adopted the new guidance on March 1, 2018, using the modified retrospective method, with no impact on its consolidated financial statements. The cumulative effect of initially applying the new guidance had no impact on the opening balance of retained earnings as of March 1, 2018. The comparative information has not been restated and continues to be reported under the accounting guidance in effect for that period. The Company does not expect the new guidance will have a material impact on its consolidated financial statements in future periods. See Note 7 for more discussion.